Financial Management, 12e (Titman/Keown/Martin)
Chapter 1 Getting Started-Principles of Finance
1.1 Finance: An Overview
1) Which of the following statements best represents what finance is about?
A) How political, social, and economic forces affect corporations
B) Maximizing profits
C) The study of how people and businesses make investment decisions and how to finance those decisions
D) Reducing risk
Answer: C
Diff: 1
AACSB: 6. Reflective thinking
Question Status: Revised
Objective: 1.1 Understand the importance of finance and identify the three primary business decisions that financial managers make.
Keywords: what is finance?
Principles: Principle 3: Cash Flows Are the Source of Value
2) From a financial point of view, a company that decides to develop new product is making
A) a financing decision.
B) an investment decision.
C) a capital structure decision.
D) a cash flow decision.
Answer: B
Diff: 1
AACSB: 6. Reflective thinking
Question Status: New question
Objective: 1.1 Understand the importance of finance and identify the three primary business decisions that financial managers make.
Keywords: what is finance?
Principles: Principle 3: Cash Flows Are the Source of Value
3) Working capital management refers to
A) long-term financing decisions.
B) the management of cash flows.
C) investing in product development.
D) capital structure.
Answer: B
Diff: 2
AACSB: 6. Reflective thinking
Question Status: Previous edition
Objective: 1.1 Understand the importance of finance and identify the three primary business decisions that financial managers make.
Keywords: capital structure
Principles: Principle 3: Cash Flows Are the Source of Value
4) Finance managers need to interact constantly with
A) marketing managers.
B) accounting staff.
C) management information systems staff.
D) all of the above.
Answer: D
Diff: 2
AACSB: 6. Reflective thinking
Question Status: New question
Objective: 1.1 Understand the importance of finance and identify the three primary business decisions that financial managers make.
Keywords: what is finance?
Principles: Principle 3: Cash Flows Are the Source of Value
5) The personal decision to obtain a college degree in business is primarily a(n) ______decision.
A) social
B) investment
C) ethical
D) financing
Answer: B
Diff: 2
AACSB: 6. Reflective thinking
Question Status: New question
Objective: 1.1 Understand the importance of finance and identify the three primary business decisions that financial managers make.
Keywords: what is finance?
Principles: Principle 3: Cash Flows Are the Source of Value
6) The area of finance that deals with long-term investment decisions is known as
A) capital structure.
B) working capital management.
C) financial strategy.
D) capital budgeting.
Answer: D
Diff: 2
AACSB: 6. Reflective thinking
Question Status: New question
Objective: 1.1 Understand the importance of finance and identify the three primary business decisions that financial managers make.
Keywords: what is finance?
Principles: Principle 3: Cash Flows Are the Source of Value
7) Capital structure refers to the financing of long-term investments.
Answer: TRUE
Diff: 1
AACSB: 6. Reflective thinking
Question Status: New question
Objective: 1.1 Understand the importance of finance and identify the three primary business decisions that financial managers make.
Keywords: what is finance?
Principles: Principle 3: Cash Flows Are the Source of Value
8) Business financial decisions are fundamentally different from personal financial decisions.
Answer: FALSE
Diff: 1
AACSB: 6. Reflective thinking
Question Status: New question
Objective: 1.1 Understand the importance of finance and identify the three primary business decisions that financial managers make.
Keywords: what is finance?
Principles: Principle 3: Cash Flows Are the Source of Value
9) What are the three basic questions addressed by the study of investments?
Answer: 1. What investments should the firm undertake?
2. How should the firm fund these investments?
3. How can the firm best manage cash flows in its day-to-day operations?
Diff: 2
AACSB: 6. Reflective thinking
Question Status: New question
Objective: 1.1 Understand the importance of finance and identify the three primary business decisions that financial managers make.
Keywords: what is finance?
Principles: Principle 3: Cash Flows Are the Source of Value
1.2 Three Types of Business
1) Which of the following is NOT an advantage of the sole proprietorship?
A) Limited liability
B) No time limit imposed on its existence
C) No legal requirements for starting the business
D) None of the above
Answer: A
Diff: 2
AACSB: 6. Reflective thinking
Question Status: Previous edition
Objective: 1.2 Identify the differences between the three major legal forms of business.
Keywords: proprietorships
Principles: Principle 2: There Is a Risk-Return Tradeoff
2) What is the chief disadvantage of the sole proprietorship as a form of business organization when compared to the corporate form?
A) Sole proprietorships are subject to double taxation of profits.
B) The cost of formation.
C) Inadequate profit sharing.
D) Owners have unlimited liability.
Answer: D
Diff: 2
AACSB: 6. Reflective thinking
Question Status: Previous edition
Objective: 1.2 Identify the differences between the three major legal forms of business.
Keywords: proprietorships
Principles: Principle 2: There Is a Risk-Return Tradeoff
3) Which of the following is NOT true for limited partnerships?
A) Limited partners can only manage the business.
B) One general partner must exist who has unlimited liability.
C) Only the name of general partners can appear in the name of the firm.
D) Limited partners may sell their interest in the company.
Answer: A
Diff: 2
AACSB: 6. Reflective thinking
Question Status: Previous edition
Objective: 1.2 Identify the differences between the three major legal forms of business.
Keywords: partnerships
Principles: Principle 2: There Is a Risk-Return Tradeoff
4) The true owners of the corporation are the
A) holders of debt issues of the firm.
B) preferred stockholders.
C) board of directors of the firm.
D) common stockholders.
Answer: D
Diff: 1
AACSB: 6. Reflective thinking
Question Status: Previous edition
Objective: 1.2 Identify the differences between the three major legal forms of business.
Keywords: corporation
Principles: Principle 2: There Is a Risk-Return Tradeoff
5) In terms of organizational costs, which of the following sequences is generally correct, moving from lowest to highest cost?
A) General partnership, sole proprietorship, limited partnership, corporation
B) Sole proprietorship, general partnership, limited partnership, corporation
C) Corporation, limited partnership, general partnership, sole proprietorship
D) Sole proprietorship, general partnership, corporation, limited partnership
Answer: B
Diff: 2
AACSB: 6. Reflective thinking
Question Status: Previous edition
Objective: 1.2 Identify the differences between the three major legal forms of business.
Keywords: corporation
Principles: Principle 2: There Is a Risk-Return Tradeoff
6) Assume that you are starting a business. Further assume that the business is expected to grow very quickly and a great deal of capital will be needed soon. What type of business organization would you choose?
A) Corporation
B) General Partnership
C) Sole proprietorship
D) Limited partnership
Answer: A
Diff: 1
AACSB: 6. Reflective thinking
Question Status: Previous edition
Objective: 1.2 Identify the differences between the three major legal forms of business.
Keywords: corporation
Principles: Principle 2: There Is a Risk-Return Tradeoff
7) Which one of the following categories of owners enjoys limited liability?
A) General partners in a limited partnership or limited liability company
B) Shareholders (common stock) of a corporation
C) Sole proprietors
D) Both A and B
Answer: B
Diff: 2
AACSB: 6. Reflective thinking
Question Status: Revised
Objective: 1.2 Identify the differences between the three major legal forms of business.
Keywords: corporation
Principles: Principle 2: There Is a Risk-Return Tradeoff
8) Which of the following is a characteristic of a limited partnership?
A) It allows one or more partners to have limited liability.
B) It requires one or more of the partners to be a general partner to whom the privilege of limited liability does not apply.
C) It prohibits the limited partners from participating in the management of the partnership.
D) All of the above.
Answer: D
Diff: 2
AACSB: 6. Reflective thinking
Question Status: Previous edition
Objective: 1.2 Identify the differences between the three major legal forms of business.
Keywords: corporation
Principles: Principle 2: There Is a Risk-Return Tradeoff
9) Which of the following forms of organization blends elements of partnerships and corporations?
A) D.B.A.'s
B) Sole proprietorships
C) Limited liability companies (LLC's)
D) General partnership
Answer: C
Diff: 2
AACSB: 6. Reflective thinking
Question Status: New question
Objective: 1.2 Identify the differences between the three major legal forms of business.
Keywords: corporation
Principles: Principle 2: There Is a Risk-Return Tradeoff
10) Which of the following types of business forms is least risky to investors?
A) Sole proprietorship
B) Limited partnership
C) General partnership
D) A public corporation
Answer: D
Diff: 1
AACSB: 6. Reflective thinking
Question Status: Revised
Objective: 1.2 Identify the differences between the three major legal forms of business.
Keywords: corporation
Principles: Principle 2: There Is a Risk-Return Tradeoff
11) Which forms of organization are free of initial legal requirements?
A) Sole proprietorship
B) General partnership
C) Corporation
D) Both A and B
Answer: D
Diff: 1
AACSB: 6. Reflective thinking
Question Status: Previous edition
Objective: 1.2 Identify the differences between the three major legal forms of business.
Keywords: partnerships
Principles: Principle 2: There Is a Risk-Return Tradeoff
12) For these types of organization, no distinction is made between business and personal assets.
A) Sole proprietorship
B) General partnership
C) Limited partnership
D) Both A and B
Answer: D
Diff: 2
AACSB: 6. Reflective thinking
Question Status: Revised
Objective: 1.2 Identify the differences between the three major legal forms of business.
Keywords: partnerships
Principles: Principle 2: There Is a Risk-Return Tradeoff
13) Which of the following is a significant disadvantage of a general partnership?
A) The cost of forming it is high.
B) Each partner is fully responsible for the liabilities incurred by the partnership.
C) There is a risk associated with the industry in which it operates.
D) Forming the business is very complex.
Answer: B
Diff: 2
AACSB: 6. Reflective thinking
Question Status: Previous edition
Objective: 1.2 Identify the differences between the three major legal forms of business.
Keywords: partnerships
Principles: Principle 2: There Is a Risk-Return Tradeoff
14) Which of the following forms of business organization is the dominant economic force in the United States?
A) The sole proprietorship
B) The general partnership
C) The limited partnership
D) The joint venture
E) The corporation
Answer: E
Diff: 2
AACSB: 6. Reflective thinking
Question Status: Previous edition
Objective: 1.2 Identify the differences between the three major legal forms of business.
Keywords: corporation
Principles: Principle 2: There Is a Risk-Return Tradeoff
15) A limited partner is liable
A) for only his or her own share of the partnership's debts.
B) for his or her own share of the partnership's debts and contingently liable for the other partners shares.
C) only up to the amount invested by that partner.
D) for none of the partnership's debts.
Answer: C
Diff: 2
AACSB: 6. Reflective thinking
Question Status: Previous edition
Objective: 1.2 Identify the differences between the three major legal forms of business.
Keywords: corporation
Principles: Principle 2: There Is a Risk-Return Tradeoff
16) A corporation is owned by
A) shareholders and partners.
B) the shareholders who hold the company's stock.
C) the Board of Directors.
D) its Chief Executive Officer.
Answer: B
Diff: 1
AACSB: 6. Reflective thinking
Question Status: New question
Objective: 1.2 Identify the differences between the three major legal forms of business.
Keywords: corporation
Principles: Principle 2: There Is a Risk-Return Tradeoff
17) The major sources of financing for corporations are
A) partners contributions.
B) exchanges between shareholders.
C) interest and dividends.
D) debt and equity.
Answer: D
Diff: 1
AACSB: 6. Reflective thinking
Question Status: New question
Objective: 1.2 Identify the differences between the three major legal forms of business.
Keywords: corporation
Principles: Principle 2: There Is a Risk-Return Tradeoff
18) The term stockholder is equivalent to
A) general partner.
B) creditor.
C) shareholder.
D) stakeholder.
Answer: C
Diff: 2
AACSB: 6. Reflective thinking
Question Status: New question
Objective: 1.2 Identify the differences between the three major legal forms of business.
Keywords: corporation
Principles: Principle 2: There Is a Risk-Return Tradeoff
19) The sole proprietorship is the same as the individual for liability purposes.
Answer: TRUE
Diff: 2
AACSB: 6. Reflective thinking
Question Status: Previous edition
Objective: 1.2 Identify the differences between the three major legal forms of business.
Keywords: proprietorships
Principles: Principle 2: There Is a Risk-Return Tradeoff
20) In a general partnership, all partners have unlimited liability for the actions of any one partner when that partner is conducting business for the firm.
Answer: TRUE
Diff: 2
AACSB: 6. Reflective thinking
Question Status: Previous edition
Objective: 1.2 Identify the differences between the three major legal forms of business.
Keywords: partnerships
Principles: Principle 2: There Is a Risk-Return Tradeoff
21) There is no legal distinction made between the assets of the business and the personal assets of the owners in the limited partnership.
Answer: FALSE
Diff: 2
AACSB: 6. Reflective thinking
Question Status: Previous edition
Objective: 1.2 Identify the differences between the three major legal forms of business.
Keywords: partnerships
Principles: Principle 2: There Is a Risk-Return Tradeoff
22) The owners of a corporation are liable for the corporation's obligations up to the amount of their investment.
Answer: TRUE
Diff: 1
AACSB: 6. Reflective thinking
Question Status: Previous edition
Objective: 1.2 Identify the differences between the three major legal forms of business.
Keywords: corporation
Principles: Principle 2: There Is a Risk-Return Tradeoff
23) General partners have unrestricted transferability of ownership, while limited partners must have the consent of all partners to transfer their ownership.
Answer: FALSE
Diff: 2
AACSB: 6. Reflective thinking
Question Status: Previous edition